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Tax planning in a high-asset divorce

On Behalf of | Oct 4, 2023 | Family Law |

CNBC reported that maintaining a more expensive lifestyle could lead to divorce as it can often spark financial arguments, and a survey found 35% of people said finances were the main trigger for their divorce. Money is a complicated topic no matter how much of it you have, especially when you want to end your relationship.

With high assets involved, it can become even more intricate. This is especially true when it comes to tax planning. Properly managing taxes during a high-asset divorce helps you preserve wealth and ensure a fair division of assets.

Varying taxation of assets

Taxes can have a significant impact on the outcome of your divorce. Different assets have different tax implications, and making informed decisions about which assets to keep and which to let go can make a substantial difference in your financial future.

For instance, selling stocks or real estate may trigger capital gains taxes, while other assets, like retirement accounts or certain types of trusts, may have tax advantages when transferred during a divorce. Careful planning can help minimize the tax impact of asset transfers.

Spousal support taxation

In the past, alimony payments were tax-deductible for the paying spouse and counted as taxable income for the receiving spouse. However, tax reforms changed this, and alimony payments are no longer deductible or taxable for divorces finalized after December 31, 2018. Make sure to factor this into your divorce negotiations.

Retirement accounts and taxes

Retirement assets can be a significant source of wealth in a high-asset divorce. These assets may include pensions, 401(k)s, IRAs or other retirement accounts. When dividing these assets, be aware of the tax implications and options. For example, you can use a Qualified Domestic Relations Order to divide certain retirement accounts without incurring early withdrawal penalties or taxes.

Timing of divorce

The timing of your divorce can also impact your tax situation. Filing status and the timing of asset transfers can affect your tax liability. For example, when you are still legally married on December 31st of a tax year, you have the option to file a joint tax return. This status can offer certain tax advantages, such as lower tax rates and higher standard deductions. Joint filing can be beneficial if you and your spouse are on amicable terms, and you can agree on how to handle your taxes cooperatively.

Tax planning is an important component of a high-asset divorce. Understanding the various tax situations that may come up with property division can enable you to preserve wealth and achieve a fair outcome.